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The Credit Cruncher was conceived to help you to keep up to date with credit crunch and recession developments, it provides some helpful credit crunch advice and it addresses personal debt. The Credit Cruncher also seeks to explain how the credit crunch started and shed some light on the worldwide recession. Recently, we have begun to look at how BREXIT will affect the UK economy. Please feel free to leave comments where relevant.

17 Dec 2008

Why interest rates can't go negative

As the US federal discards convention and sets a 'range' for base rates instead of a specific target, one is left asking 'how low can it go?'. The range set is an astonishing 0-0.25%, enabling borrowing at an unprecedented zero percent.
On idea behind dropping interest rates to near-zero levels is to persuade people to spend. The thinking is that if people do not earn anything from their savings, then they will be less likely to save. However, this ignores the fact that when people have no confidence in their financial future, they are not likely to spend any more than necessary.
My feeling is that market confidence is so low that even at a 0% rate, consumers will not be rushing out to convert their precious savings into goods and services (assuming the average consumer has any savings which may be a myth anyway).
The low interest rate however, has the potential to make a difference to the banks' commercial customers which is surely the intention of the measure - the effect on tracker mortgages is merely a (very welcome) side effect. I am aware however that some banks are still charging 29%pa for unauthorised overdrafts on accounts for small businesses, so clearly it is not the small businesses that the measure is aimed at but the big fat corporations who have the politicians in their pockets. Is this an economic or political decision? I'll leave you to decide...
So the question remains - what happens if interest rates go negative? Simply put, anything on deposit could then have a charge applied to it - so...anybody with any money would immediately withdraw it from a deposit account and place it in a current account, or take it home and put it in the mattress or place it in a foriegn bank. The money available to the banks is already depleted, that's what the credit crunch is all about - setting a negative interest rate would more or less clean the banks out and leave them gasping for air. Borrowing money at negative interest would become a way to earn money - once more there would be such a clamour to borrow money that the banks would be cleared out in no time - and because the borrowers would be looking to make money rest assured they will be spending NONE of it!
This is my submission then, interest rates cannot under any circumstances go negative or pure chaos will ensue and the banks will all go to the wall.

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